Analyzing the Causal Relationship between Trade, FDI and Economic Growth: In the Case of India

Abstract

This study analyzes the relationship between trade, FDI and economic growth in India from 1980 to 2019. India’s economic reform began in the early 1980s, but the full-scale liberalization and privatization process began in July 1980 due to the balance-of-payments crisis and liquidity crisis faced by the economy. India has been a protectionist country for a while, but has gradually changed to a country open to international trade, and as of 2019, trade accounted for 43.3% of the country’s GDP. The main export products are petroleum (14.6%) and diamonds (7.9%) as primary products, and major trading partners are the United Arab Emirates and China. South Korea recently signed a free trade agreement with ASEAN. The results of analyzing the relationship between trade, FDI, and economic growth in India are as follows. The results of the Granger causal relationship showed that there is a one-way causal relationship between GDP and exports, and that GDP affects the significance level of 5% of exports. In the case of India, an increase in imports or FDI has a positive effect on the increase in GDP, but it is not significant. An increase in exports has a rather negative effect on an increase in GDP, and the VECM results show that when exports increase, GDP decreases by 9% at a level of 10% significance.